“People are often more willing to act based on little or no data than to use data that is a challenge to assemble” – Robert J. Shiller
In the stock market Volume is the data “that is a challenge to assemble”. A typical chart with volume at the bottom, spiking in what they seem odd places with no meaning or detectable trend, is often ignored by traders and soon the volume histogram is disabled. These traders don’t see any added information coming from volume, but little they know that they are disabling one of the purest leading indicators available.
The market gives us two major “pure” indicators: price and volume. A great number of traders ignore volume and center their efforts in analyzing price, which on itself is not a bad thing, but discarding volume is throwing away half of the information given by an already stingy market.
Through the years, I’ve developed the XBP Volume Ratio which mixes both volume and price data to plot a leading indicator that warns traders of potential trend changes and optimal trend entry spots. The indicator can even be plotted as an oscillator or as a bound-less indicator.
The chart above corresponds to the market action for the 21st of November 2017. On the left chart we have a 1597 ticks chart for the ES (S&P 500 futures) and on the right a 610 ticks chart for GC (Gold Futures). The 1597 and 610 are Fibonacci numbers as I use the sequence of Fibonacci to scale my tick charts. You can as well use any other sequence of your preference.
The XBP Volume Ratio indicator is plotted here in the 2 flavours, at the top as an oscillator (bounded between 0 and 100) and at the bottom as a bound-less indicator. The light blue color appears when the indicator is trending up and the purple color when trending down. When there is not a clear trend, usually on one bar at trend changes, the indicator will be colored gray.
Plotting the indicator as an oscillator has the benefit of knowing which percentage of volume is pushing in each direction at the time (as interpreted by the indicator). Knowing that we are near the 80% mark of up volume is a warning that the up-trend could stall momentarily as the market is over-bought. Plotting the indicator as bound-less has the benefit to see the different extremes on volume how they compare to the previous ones. For example, in the GC chart, we can see 4 volume peaks in the oscillator view of nearly the same value while on the bound-less chart we can see how each peak is lower to the previous one. This signals that the up-trend is getting weaker.
Early Trend Change Warning
Divergences between XBP Volume Ratio and price are also spotted in both views (oscillator and bound-less). A divergence occurs when price makes a new high while XBP Volume Ratio makes a lower high. We can see an example of this in the following ES chart:
These divergences are a clear sign that the impulse of bringing prices higher is getting weaker. The opposite kind of divergences are also spotted during down-trends, when price is making new lower lows but the XBP Volume Ratio indicator is making higher lows. In both cases the meaning is the same, the forces behind the trend are getting weaker, which signals a possible change to a range (horizontal) market or to a trend reversal.
At this point, let me remind you that XBP Volume Ratio is a leading indicator when detecting trend changes. Do not fade the market based on XBP Volume Ratio alone but use the indicator as an early warning for your trend based indicator. The combination of the two indicators shall give you clear signals to enter and exit the market.
Entering a Trend At the Right Moment
XBP Volume Ratio helps you to avoid entering an up-trend right when price pulls back enough to hit your stop and to just then resume the way up. I’m sure this is familiar to you. It happened to me many times. It happens to many of us.
As XBP Volume Ratio interprets both price and volume data, it can detect those pull-back moves and indicates clearly when the original trend resumes. When on an up-trend you can enter on a valley that occurs below the 50 mark in the oscillator view or the 0 mark in the bound-less view. The change in color will help you to detect that exact moment with just 1 bar of delay, which is the first closed bar that resumed the original trend.
You can adjust the Length of the indicator, which controls how many price bars the indicator takes for its calculations, but the by default value of 12 seems to work well. Yet, you can change that value to adjust the indicator to your instruments.
XBP Volume Ratio together with Trend indicators
By now you shall have a good idea of the benefits of analyzing volume to spot trend changes and trend entry points thanks to the XBP Volume Ratio indicator. The next part will be to have a clear idea of when a trend is developing, how strong it is and if it is a bull or a bear trend. For this, I use two built-in indicators in ThinkOrSwim: Trend Noise Balance and Trend Periods both indicators developed by David Sepiashvili.
As a summary, the Trend Periods indicator plots a +1 line when on a bull trend and a -1 when on a bear trend. Trend Noise Balance indicator tells us the strength of the trend with values below 50 being of a weak trend, between 50 and 65 of a developing trend, between 65 and 80 of a moderate trend and above 80 of an strong trend.
With the combination of the XBP Volume Ratio and the Trend indicators, you can easily and safely enter an on-going trend with just a little probability of being stopped out on a pull-back, or enter a new trend knowing that the previous trend lost force and was too weak to continue.
You can as well combine the XBP Volume Ratio indicator with more “classic” trend following indicators such as moving averages, MACD and RSI, as shown in the screenshot below where on the left side you can find those indicators while on the right side you can see the same market action with the Trend indicators:
You could as well use XBP Volume Ratio with time based (1 minute for example) charts. Personally I do not recommend using time based charts for day trading, as time shall not be a relevant variable when analyzing intraday action. I think that time based intraday charts distort the reality and the readings of any indicators used. The following screenshot shows the same market action, for the 21st of November 2017, but this time using 1-minute charts. I hope that you can compare the tick based charts versus the time based charts and see how much clear the tick charts are:
For further comparison, the next screenshot has a tick chart on the left and a 1-minute chart on the right with the same indicators setup:
Getting the XBP Volume Ratio
If you are interested in using the XBP indicators, simply send me an email and we will complete the transaction using PayPal. The price of all indicators for a life-time license is of USD 100, just 2 E-mini points 😉
PayPal link: paypal.me/xbptrading
Why there is no a “Buy” button in the site? Well, because I’m not a company. I’m just a trader. My business is not to sell you an indicator. Still, I’m exploring ways in which I could automate this process.